Behind the demerger mania

Business is in the grip of a mania for demergers that knows no geographic boundaries and is transforming many industries. While shareholders are generally doing very well, this latest corporate fashion could well be brewing problems for others.

The central paradox in this latest manifestation of the Darwinian business cycle is that the companies doing the demergers are, in many cases, the same ones that promised shareholders great things from taking over the very businesses they are spinning off.

Some obvious examples in recent times are the demerger of Treasury Wine Estates from
Foster’s Group
and the demerger of TNT Express from Dutch Postal giant TNT NV.

The Foster’s expansion into wine in the early part of the past decade created the world’s largest wine company but it never delivered the returns that were promised.

Similarly, the Dutch marriage in 1996 of a postal business with a global express delivery company created by Australian Ken Thomas, never worked.

Today, in a business version of Jurassic Park, lumbering giants intent on creating “shareholder value" are ready to gobble up the shiny independent companies created by the break-up of other lumbering giants who realised the error of their ways.

In beverages, international beer makers, Grupo Modelo and Molson Coors are said to be looking at Foster’s now that it has shed the Treasury Wine Estates business, which is itself the subject of takeover speculation.

In gambling, big US casino operator Wynn is said to be interested in buying
Echo Entertainment
, which was officially created last week when
Tabcorp
shareholders approved its spin-off as a separate company.

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The old Tabcorp, which is now a pure wagering business, and Echo begin trading on the Australian Stock Exchange on Monday. That will provide a test of the merits of the deal. If both trade higher, shareholders will have done well.

Shareholders of Tabcorp who now own shares in two companies could well have takeover offers in their mail boxes.

That is despite the fact that more often than not, big takeovers destroy shareholder value. For some reason business leaders have found it difficult to learn the lessons of the past.

The extent of demerger mania is evident from the latest data from research house Dealogic. It shows that in the year to date there have been 82 demerger proposals globally valued at $US58 billion ($54.3 billion). That is twice the number that occurred in the previous two years and the highest value in more than three years.

Australia ranks highly on the list of biggest demerger deals since January 2010 thanks to the $US8.59 billion demerger of
Westfield Trust
from
Westfield Group
. This demerger was completed in December last year, 6½ years after Westfield Trust was merged with Westfield America Trust and Westfield Holdings.

Westfield provides a good example of the changing fashions in corporate restructuring activity. The original merger of the three Westfield entities was meant to achieve three aims: end the fragmentation of shopping centre ownership in several countries, get a bigger balance sheet to fund growth and end the constraints on growth in the Australian, New Zealand and American markets.

However, Westfield shareholders discovered that while these aims were met, it did not result in a rising share price. The fit-for-purpose investment vehicles that were delivering what shareholders wanted were replaced with something that was neither fish nor fowl.

One thing is now clear, the Lowy family, which controls the group, has shown a willingness to respond to reality. It has put Westfield back on a path to offering a high-growth development vehicle and traditional solid-yielding shopping centre entities. Spin-offs in Ameria and Europe are on the cards.

Westfield stands apart from other demerger examples because its spin-off is, strictly speaking, not available for a takeover offer.

This takeover availability is one of the critical drivers of value for those who were once locked in a poor-performing, lumbering giant.

Figures obtained by Chanticleer from investment bank UBS show that of all the demergers undertaken in the Australian market over the past 12 years, about half have resulted in one or both resultant companies subsequently being acquired.

CSR
was on the brink of demerging its sugar business when it was taken over by Wilmar for cash in 2009.

Seven years earlier, CSR did one of the best-performing spin-offs seen in Australia with the demerger of Rinker. This cement business was taken over by Mexican group Cemex in 2007 at a huge premium.

Toll-road group Intoll was taken over by the Canada Pension Plan Investment Board in 2010, a year after it was spun off from Macquarie Infrastructure Group.

Alinta Energy, which was spun out of AGL, was later acquired by Babcock and Brown. Shareholders did not do well out of that takeover because they were stuck with various bits of scrip in Babcock entities, most of which struck trouble.

A high watermark for delivering huge returns from demergers was
Boral
. It was the source of the Origin Energy spin-off, which has been a huge success story under the leadership of
Grant King
. Origin was the subject of a failed bid from BG Group in 2009. After the bid died, Origin managed to secure a $10 billion deal to sell coal seam gas to ConocoPhillips. A demerger that triggered a controversial takeover offer was the spin-off of Western Mining Corp from Alumina in 2001. WMC Resources was later acquired by BHP Billiton in 2005.

Other companies that have remained independent after demerger are
AMP
and London-based funds manager Henderson Group. Henderson, however, has been subject to takeover rumours recently. Meanwhile, AMP has attempted to secure its independence by getting bigger with its takeover of
AXA Asia Pacific
.

One aspect of demergers that is not often discussed is the intense focus that it brings to the management of the smaller entity.

A live example is the earlier mentioned spin-off of TNT Express from the Dutch postal company.

TNT Express plans to change its strategy, which has tended to focus on the business-to-business segment of the courier express parcels market.

While the business segment is the largest in the courier express parcels market, the fastest growing is the much smaller segment called business to consumer or e-commerce.

For courier companies, e-commerce really means delivering parcels bought on the internet. TNT Express in Australia already is in the e-commerce market. It delivers all Apple products bought online.

As an independent entity and without the limitations of cumbersome post business, TNT Express will be able to take on Australia Post, which dominates e-commerce delivery.

Of course, the lumbering giant could well take over the shiny new delivery firm.